Will a Recent Earnings Release Offer Wells Fargo a Boost?

With shares of Wells Fargo (NYSE:WFC) trading around $41, is WFC an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Wells Fargo is a diversified financial services company. It has three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. The company provides retail, commercial, and corporate banking services through banking stores and offices, the Internet, and other distribution channels to individuals, businesses, and institutions around the world. Wells Fargo also provides wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing, and venture capital investment.

Wells Fargo reported record net income of $5.6 billion, or $0.99 per diluted common share, for third quarter 2013, up from $4.9 billion, or $0.88 per share, for third quarter 2012. “As our economy continues to transition to higher interest rates, our diversified business model and strong risk discipline contributed to record earnings per share along with continued strength in return on assets, return on equity and capital. “The improvement in the housing market has been beneficial to our customers and significantly contributed to our broad-based credit improvement in the quarter,” said Chairman and CEO John Stumpf.

T = Technicals on the Stock Chart are Mixed

Wells Fargo stock has seen positive progress over the last several months. The stock has been pulling-back from all-time highs so it may need a bit a time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Wells Fargo is trading between its key averages which signal neutral price action in the near-term.

WFC

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Wells Fargo options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Wells Fargo Options

21.01%

13%

11%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Wells Fargo’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Wells Fargo look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

12.50%

19.51%

22.67%

24.41%

Revenue Growth (Y-O-Y)

-3.30%

0.42%

-1.74%

6.52%

Earnings Reaction

-0.41%*

1.84%

-0.79%

-0.84%

Wells Fargo has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been disappointed with Wells Fargo’s recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Wells Fargo stock done relative to its peers, Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), and sector?

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Sector

Year-to-Date Return

20.04%

22.18%

24.32%

19.29%

20.07%

Wells Fargo has been an average relative performer, year-to-date.

Conclusion

Wells Fargo is a leading provider of financial services to consumers and companies around the world. A recent earnings release did not please the markets. The stock has been moving higher in recent quarters and is now pulling-back from all-time high prices. Over the last four quarters, earnings have been rising while revenues have been mixed which has mostly disappointed investors. Relative to its peers and sector, Wells Fargo has been an average year-to-date performer. WAIT AND SEE if Wells Fargo can break above its recent pullback.

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